This guide is for general information only. Collateral warranties are legal documents. Their drafting, review and negotiation requires a qualified solicitor. BuildAlliance does not provide legal advice - see Managing the Warranty Schedule for how we support clients within our professional scope.
What is a Collateral Warranty?
A collateral warranty is a legal agreement that gives a third party - such as a development funder, a purchaser or a tenant - a direct contractual relationship with a contractor or consultant involved in a construction project.
To understand why collateral warranties exist, it helps to understand the problem they solve. In English law, only the parties to a contract can enforce its terms - this is known as the principle of privity of contract. A main contractor has obligations to the client under the building contract; a structural engineer has obligations to the client under their professional appointment. But a funder lending money against the development, or a purchaser buying the completed building, is not party to those agreements. Without further steps, they would have no direct right of action against the contractor or design team if something went wrong.
A collateral warranty creates a direct contractual link between the person providing the warranty (the contractor or consultant) and the third party beneficiary (the funder, purchaser or tenant). It sits alongside - is "collateral to" - the main contract or appointment without changing the original agreement. The warranting party agrees to owe certain obligations directly to the beneficiary, giving that beneficiary direct recourse if those obligations are breached.
Who Typically Requires a Collateral Warranty?
Development Funders
Lenders providing development finance typically require collateral warranties from the main contractor and key consultants as a condition of funding. The warranty gives the funder direct recourse against those parties if construction defects or design failures affect the value of their security. Without warranties, the funder's only recourse in the event of a problem would be through the borrower - they would have no direct claim against the contractor or design team who caused the loss. Funder requirements are usually set out in the facility agreement and should be understood before procurement begins.
Purchasers and Investors
Where a development is being sold on a forward purchase basis, or following completion, the incoming purchaser or investor will typically require warranties from the contractor and design team to protect their position. On investment-grade commercial property transactions, the absence of appropriate warranties can affect saleability, value and the ability to secure finance on the asset in the future.
Tenants
On commercial developments, a tenant taking a full repairing and insuring lease - where responsibility for repair and maintenance passes to the tenant - may require warranties from the design team so they have direct recourse if latent defects emerge after occupation. This is particularly relevant for tenants taking long leases on purpose-built or bespoke premises.
Who Typically Provides Collateral Warranties?
On a typical construction project, warranties may be required from a range of parties:
Main Contractor
The main contractor is usually the primary warranty provider - their warranty covers the execution of the construction works as a whole.
Key Specialist Subcontractors
Subcontractors responsible for elements with significant structural or building envelope implications are often required to provide warranties directly to the funder or purchaser. This typically includes subcontractors for structural steelwork, mechanical and electrical installations, cladding and facades, piling and groundworks. The rationale is that defects in these elements can be significant in cost and impact, and the funder or purchaser wants direct recourse against the specialist responsible - not just through the main contractor.
Professional Consultants
The design team - architect, structural engineer, mechanical and electrical engineer, and principal designer - are routinely required to provide warranties. Depending on funder requirements, the quantity surveyor, project manager and employer's agent may also be named. The scope of a consultant's warranty relates to their professional services rather than the works themselves.
The specific list of required warranty providers and their beneficiaries should be established at procurement stage, agreed with legal advisors and built into the relevant appointments and contracts before parties are engaged.
What Collateral Warranties Typically Contain
Collateral warranties vary in their terms depending on the form used, the project, the funder's requirements and any negotiated amendments. The following is a general description of provisions commonly found in warranty documents - it is not legal advice, and the terms of any specific warranty should be reviewed and advised upon by a solicitor.
Duty of Care
The warranting party typically acknowledges that they owe a duty of care to the beneficiary in carrying out their works or services - broadly replicating the standard they owe to the original client.
Professional Indemnity Insurance
Warranties commonly include a covenant by the warranting party to maintain professional indemnity insurance (or contractor's all risk and public liability insurance, for contractors) to a specified level and for a specified period. The beneficiary needs to be satisfied that there is sufficient insurance backing the warranty.
Assignment
Many warranties include provisions allowing the benefit to be assigned to a successor - for example, a new funder following a refinancing, or a purchaser following a sale of the completed development. The number of permitted assignments and any conditions on assignment vary between forms.
Step-In Rights
Funder warranties frequently include step-in rights - provisions allowing the funder to take over the employer's position under the building contract or professional appointment if the main contract is terminated or the developer defaults. Step-in rights are designed to protect the funder's ability to ensure the development can be completed even if the original client is unable to continue. See the FAQ below for more detail.
Net Contribution
Some warranties include a net contribution clause, which limits the warranting party's liability to a fair proportion of the loss - taking into account that other parties (other members of the design team, the contractor) may share responsibility for the same damage. This provision is sometimes resisted by funders and purchasers and is a common point of negotiation.
Deleterious Materials
Contractor warranties typically include a statement that specified harmful or prohibited materials (such as those listed in agreed project specifications) were not used in the construction of the works.
Important: The terms of any collateral warranty - including whether specific provisions are present, how they are drafted and how they interact with other project documents - require review by a solicitor. BuildAlliance does not advise on the legal content of warranties.
Collateral Warranties vs Third Party Rights
Collateral warranties are not the only mechanism for giving third parties direct rights against contractors and consultants. The Contracts (Rights of Third Parties) Act 1999 (CRTPA) provides an alternative: a contract can expressly confer enforceable rights on a third party without the need for a separate deed.
In practice, this means that a third party rights (TPR) schedule can be included within the building contract or professional appointment itself. Rather than executing individual warranty deeds with each beneficiary, rights are granted at the point of contract execution, in favour of identified categories of third party (funders, purchasers, tenants).
Advantages of Third Party Rights Schedules
- Simpler to administer - no separate deeds to negotiate, execute and manage for each individual warranting party
- Rights exist from the point of contract execution; no subsequent process to obtain them
- Increasingly used on larger or more complex projects with multiple subcontractors and consultants
- Reduces risk of warranties not being obtained if a subcontractor or consultant later becomes uncooperative
When Collateral Warranty Deeds Are Still Preferred
- Many funders and their solicitors still prefer executed deed warranties - they are a more familiar and established mechanism
- Some beneficiaries require warranties in a specific form (such as a standard funder form) that may not map directly onto a TPR schedule
- On smaller projects, the number of warranties required may be manageable
In practice both approaches are used, sometimes on the same project. Legal advice is required to determine the appropriate mechanism and to ensure it meets the requirements of funders and other beneficiaries.
Standard Forms: CIC and BPF
Rather than drafting warranty agreements from scratch - which is time-consuming, expensive and frequently leads to extended negotiation - the construction and property industries have developed standard forms that are widely recognised and accepted.
CIC Collateral Warranties
The Construction Industry Council (CIC) publishes standard collateral warranty forms for use across the UK construction industry. The principal forms are:
- CoWa/F - for use by consultants in favour of a development funder
- CoWa/P&T - for use by consultants in favour of a purchaser or tenant
Equivalent contractor forms are also published. CIC warranty forms are widely accepted by lenders and their legal teams and form the basis of warranty requirements on a large proportion of UK construction projects.
BPF Forms
The British Property Federation (BPF) has published model warranty forms used on commercial development transactions, particularly where the development is being acquired by an institutional investor or REIT. BPF forms are familiar to investment-grade property transactions and their use can simplify the due diligence process on acquisition.
Bespoke and Funder-Specific Forms
Some lenders and major institutional purchasers require warranties in their own prescribed form, which may contain additional requirements or negotiated amendments. These typically involve more extensive legal input to agree. Where bespoke forms are required, it is particularly important to identify this early - bespoke warranties take longer to negotiate and execute, and leaving them to the end of a project creates risk.
Using a recognised standard form wherever possible reduces legal cost and the likelihood of delay caused by protracted warranty negotiation at a critical project milestone.
Managing the Warranty Schedule
One of the most common warranty problems on construction projects is not about the terms of the documents - it is about timing and process. Warranties are frequently agreed in principle during procurement but then not formally executed until much later, sometimes after practical completion, when the client's leverage to obtain them has significantly diminished.
On a well-managed project, warranty requirements are addressed systematically from the earliest stages:
- Warranty requirements - who must provide them, to whom, and in what form - are identified and agreed before procurement, in coordination with the client's legal advisors
- Obligations to provide warranties are built into the building contract and professional appointments at the point of engagement, not added as an afterthought
- A warranty schedule is maintained - tracking every required warranty, its form, status and target execution date
- Execution is managed as part of the project programme, with warranties obtained before any triggering event: funding drawdown, forward sale completion or lease execution
- Where bespoke or funder-specific forms are required, the review and negotiation process is started early enough to avoid delays at key milestones
BuildAlliance's Role
As Project Manager and/or Employer's Agent, BuildAlliance supports clients in managing the warranty process within the scope of those roles as defined by RICS Professional Standards. This includes advising on procurement and contract structure to ensure that appropriate warranty obligations are incorporated into appointments and contracts; maintaining and managing the warranty schedule; coordinating with the client's legal advisors and the parties providing warranties; and monitoring progress to ensure warranties are delivered to programme.
BuildAlliance does not draft, review or advise on the legal terms of warranty documents. Those services require a solicitor, and we work alongside the client's legal team to ensure the process as a whole is managed effectively.
Risks When the Process Isn't Managed
The consequences of a poorly managed warranty process can be significant:
- Development becomes un-fundable: if the funder's required warranties cannot be produced in the agreed form, funding conditions may not be met. Where a contractor or consultant has subsequently become insolvent or uncooperative, obtaining warranties retrospectively may be impossible.
- Forward sale or investment transaction falls through: a purchaser or investor who cannot receive warranties in the required form at completion may have grounds to delay, renegotiate or withdraw - with significant commercial consequences.
- Tenants have no direct recourse: where a tenant's warranty was never obtained, they may have no direct claim against the design team if latent defects emerge after occupation - despite being responsible under their lease for the cost of repair.
- Gaps in the liability chain: a key subcontractor or consultant who was never required to provide a warranty leaves the client and their funders without direct recourse for specific elements of the works, even where responsibility is clear.
- Retrospective cost and delay: attempting to obtain warranties after practical completion - when contractors and consultants have been paid and demobilised - is time-consuming and sometimes unsuccessful, creating delay and legal cost at a commercially sensitive time.
The cost of managing the warranty process properly as part of project setup is small relative to the cost of any of these outcomes. Identifying requirements early, building obligations into appointments and contracts, and tracking execution through the programme is the most reliable way to ensure warranties are in place when they are needed.
Frequently Asked Questions
What is a collateral warranty in construction?
A collateral warranty is a legal agreement that gives a third party - such as a funder, purchaser or tenant - a direct contractual relationship with a contractor or consultant on a construction project. It exists because, under the principle of privity of contract, only parties to a contract can enforce its terms. A collateral warranty allows a third party to have direct recourse against a contractor or consultant without needing to have been party to the original contract or appointment.
Why do funders require collateral warranties?
Development funders require collateral warranties from the main contractor and key consultants as a condition of providing finance. The warranty gives the funder direct recourse against those parties if construction defects or design failures affect the value of their security. Without warranties, the funder's only recourse in the event of a problem would be through the borrower.
Who is typically required to provide collateral warranties?
The main contractor, key specialist subcontractors (typically structural, mechanical and electrical, piling and cladding specialists) and professional consultants (architect, structural engineer, M&E engineer, principal designer) are most commonly required. The specific list is set out in the building contract and professional appointments, agreed at procurement stage. Legal advice should be sought to determine appropriate warranty requirements for a specific project.
What is the difference between a collateral warranty and third party rights?
A collateral warranty is a separate legal document - typically a deed - executed in favour of a named beneficiary. Third party rights under the Contracts (Rights of Third Parties) Act 1999 are an alternative: rights can be conferred on a third party within the original contract itself, without a separate deed. Third party rights schedules are increasingly used where many individual warranty deeds would otherwise be required. Both achieve a broadly similar outcome. Legal advice is required to determine the appropriate approach.
What are CIC collateral warranties?
The Construction Industry Council (CIC) publishes standard collateral warranty forms widely used across UK construction. The main forms are CoWa/F (for funders) and CoWa/P&T (for purchasers and tenants). These are recognised by lenders and their solicitors and reduce the need for lengthy negotiation over bespoke warranty terms. The British Property Federation (BPF) also publishes standard forms used on commercial development transactions.
When should collateral warranties be agreed and executed?
Warranty requirements should be identified before procurement, with obligations built into appointments and contracts from the outset. Execution of individual warranties should be tracked as part of the project programme and completed before any triggering event - funding drawdown, forward sale completion or lease execution. Attempting to obtain warranties after practical completion, when leverage has diminished, frequently causes delay and sometimes fails entirely.
Can a collateral warranty be assigned to a new owner or funder?
Many collateral warranties include assignment provisions that allow the benefit to be passed to a successor - such as a new funder following refinancing, or a purchaser after a property sale. The number of permitted assignments and any conditions on assignment vary between forms and may be subject to negotiation. Legal advice should be sought on assignment provisions in the context of a specific transaction.
What is a step-in right in a collateral warranty?
A step-in right is a provision - typically in a funder's warranty - that allows the funder to take over the employer's position under the building contract or professional appointment if the main contract is terminated or the developer defaults. Step-in rights are designed to protect the funder's ability to ensure the development can be completed. The mechanics and conditions of step-in vary between warranty forms, and legal advice is required on their implications in any specific project and funding arrangement.
Need Help Structuring Your Project's Contracts?
BuildAlliance supports clients in structuring procurement and contracts to protect their interests and meet funder requirements. As your Employer's Agent and Project Manager, we ensure warranty obligations are built in from the start and managed to programme - working alongside your legal team, not instead of them.
We work with developers, public sector bodies and institutional clients across commercial, residential and mixed-use projects. If you are planning a project and want to ensure your contract and procurement structure is right from the outset, get in touch.
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